UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-9114
THE NEEDHAM FUNDS, INC.
(Exact name of registrant as specified in charter)
445 Park Avenue
New York, New York 10022
(Address of principal executive offices) (Zip code)
The Corporation Trust Company
300 E. Lombard Street
Baltimore, Maryland 21202
(Name and address of agent for service)
Registrant's telephone number, including area code:
(212) 371-8300
Date of fiscal year end: December 31
Date of reporting period: January 1, 2004 to December 31, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
Annual
Report NEEDHAM FUNDS
Seeking to build wealth for long-term investors.
December 31, 2004
Needham Growth Fund
Needham Aggressive Growth Fund
Needham Small Cap Growth Fund
WWW.NEEDHAMFUNDS.COM
[Needham Funds LOGO]
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
WWW.NEEDHAMFUNDS.COM
Annual Report
December 31, 2004
CONTENTS
<Table>
MANAGEMENT DISCUSSION AND ANALYSIS 1
PORTFOLIO CHARACTERISTICS
NEEDHAM GROWTH FUND 3
NEEDHAM AGGRESSIVE GROWTH FUND 4
NEEDHAM SMALL CAP GROWTH FUND 5
DISCLOSURE OF FUND EXPENSES 6
SCHEDULE OF INVESTMENTS
NEEDHAM GROWTH FUND 7
NEEDHAM AGGRESSIVE GROWTH FUND 11
NEEDHAM SMALL CAP GROWTH FUND 13
SCHEDULE OF SECURITIES SOLD SHORT
NEEDHAM GROWTH FUND 10
STATEMENTS OF ASSETS AND LIABILITIES 15
STATEMENTS OF OPERATIONS 16
STATEMENTS OF CHANGES IN NET ASSETS 17
FINANCIAL HIGHLIGHTS
NEEDHAM GROWTH FUND 18
NEEDHAM AGGRESSIVE GROWTH FUND 19
NEEDHAM SMALL CAP GROWTH FUND 20
NOTES TO FINANCIAL STATEMENTS 21
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 25
FUND MANAGEMENT 26
SUPPLEMENTAL DATA 27
</Table>
Needham Funds ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
Dear Shareholders,
We at The Needham Funds, Inc. focus on buying growth stocks at reasonable
prices. In the volatile twelve-month period we have just experienced, we are
pleased that each of the Funds ended the year in positive territory for our
investors. During 2004, the Growth Fund appreciated 6.20%, the Aggressive Growth
Fund appreciated 11.64% and the Small Cap Growth Fund appreciated 10.34%. By
comparison, the S&P 500 Index appreciated 10.85%, the NASDAQ Composite Index
appreciated 9.12% and the Russell 2000 Index appreciated 18.38%.
The Needham Growth Fund (the "Growth Fund") seeks to create long-term,
tax-efficient capital appreciation for its investors. To this end, the Growth
Fund targets companies with products or services that are selling or marketing
into growth markets. These companies normally have earnings growth of at least
15-20%, product and market dominance, and the ability to consolidate their
market positions. They may also have a competitive advantage by acquiring and
retaining more customers or driving costs down and profits up. The Growth Fund
also looks for seasoned and motivated managements with records of building
shareholder value. Companies with these characteristics sometimes find
themselves in a temporary earnings downturn or shortfall or may be in a product
transition. This often causes aggressive growth or dynamic growth investors to
sell. At this point, the Growth Fund may deem the stock to be reasonably priced
and purchase it for long-term capital appreciation. Hence, the discipline called
"Growth At a Reasonable Price," or "GARP."
We continue to focus on adding attractive GARP names for the Growth Fund. The
Growth Fund was up 13.35% for the fourth quarter, up 6.20% for the 1 year, up
3.91% for the 3 years, up 6.21% for the 5 years, and up 19.85% since inception,
compounded annually. We are not satisfied with these results. Our two sectors of
greatest concentration are technology and healthcare -- both sectors
underperformed the averages in 2004. If you will recall, both sectors
outperformed in 2003. We do not plan to abandon technology and healthcare, but
we will continue to diversify the portfolio into good stocks in other sectors.
We have approximately 6.8% in cash and fixed income investments. We sold out of
35 positions in 2004 but on a slow, targeted basis. The Growth Fund now has 86
positions. We are comfortable with that number. On the short side, we reduced
our positions down to 4.9% early in the fourth quarter. This reduced short
position benefited the Growth Fund in the quarter as the market gained. Our
best-performing stocks in 2004 were Ceradyne, Inc., Talisman Energy, Inc.,
Scientific-Atlanta, Inc. and Kronos, Inc.
The Needham Aggressive Growth Fund (the "Aggressive Growth Fund") seeks to
create long-term, tax-efficient capital appreciation for its investors. To this
end, the Aggressive Growth Fund targets the equities of companies with strong,
above-average prospective growth rates. The Aggressive Growth Fund invests, in
general, in markets and industries with strong growth rates, focusing on the
market leaders in these areas. These market leaders, especially as they break
away from their competitors, tend to garner a disproportionate share of the
positive financial returns. Also important is the long-term sustainability of
the companies' leadership positions. Thus, the Aggressive Growth Fund looks for
companies with strong management teams, superior balance sheets, above-average
margins that can generate excess cash, and strong R&D and brand spending in
industries with high barriers to entry.
The Aggressive Growth Fund was up 15.05% for the fourth quarter, up 11.64% for
the 1 year, up 5.41% for the 3 years, and up 8.60% since inception, compounded
annually. The performance of the Aggressive Growth Fund improved in the second
half of 2004 on both an absolute and relative basis. Not only were the equity
markets the strongest in the fourth quarter of the year, but also the Fund
directly benefited from the decision to take a more aggressive stance. This was
characterized by two factors: 1) shifting the mix in the portfolio toward
younger, but faster-growing companies and away from more stable, but
slower-growing companies; and 2) significantly reducing the cash position. Also
contributing to the positive performance was the elimination of the short
positions by the end of the third quarter. As we noted in our last report, for
the year our hedging activities limited modestly the overall positive returns of
the Aggressive Growth Fund. The sector exposure of the Fund changed very little
through the year and continues to be fairly balanced between consumer,
healthcare, business services and technology. All areas contributed to the
Aggressive Growth Fund's performance, with at least one stock from each of these
four sectors in the top five contributors for
1
Needham Funds
- --------------------------------------------------------------------------------
the year. These top stocks were Precision Castparts Corp., 51Job, Inc., Biogen
Idec, Inc., Intuitive Surgical, Inc. and PETCO Animal Supplies, Inc.
The Needham Small Cap Growth Fund (the "Small Cap Growth Fund") seeks long-term,
tax-efficient capital appreciation by investing primarily in equity securities
of smaller growth companies that the Small Cap Growth Fund believes are trading
at a discount to their underlying value yet have the potential for superior
long-term growth. Under normal conditions, the Small Cap Growth Fund invests at
least 80% of its total assets in equity securities of domestic issuers that have
market capitalizations of $2 billion or less and that are listed on a nationally
recognized securities exchange or traded on the NASDAQ system. Central to the
Small Cap Growth Fund's investment strategy is a sound valuation discipline that
seeks to acquire growth companies at reasonable prices. The Small Cap Growth
Fund seeks tax efficiency by holding securities for a period of 12 months or
more to obtain long-term capital gain treatment and by offsetting capital gains
on the sale of securities with capital losses.
The Small Cap Growth Fund was up 14.70% for the fourth quarter, up 10.34% for
the 1 year, and up 26.78% since inception compounded annually. We are not
satisfied with these results. Two sectors of concentration are technology and
healthcare -- both underperformed the averages. If you will recall, both sectors
outperformed in 2003 and the resulting 62% return outperformed all of the
indices by a wide margin. We do not plan to abandon technology and healthcare;
however, we will continue to diversify the portfolio into other sectors but only
into quality growth stocks. Early in the fourth quarter, we eliminated our short
position and invested cash more aggressively so that we ended the year with only
1.7% in cash. We still want to find and invest in growth companies that show
strong annual increases in earnings over several years and thus we can own them
for two, three, five or more years. The Small Cap Growth Fund benefited in 2004
from several good performers: Ceradyne, Inc., First Horizon Pharmaceutical
Corp., Bright Horizons Family Solutions, Inc. and Immucor, Inc.
The portfolio turnover rate was 15% for the Growth Fund, 64% for the Aggressive
Growth Fund and 68% for the Small Cap Growth Fund for the year ended December
31, 2004. The expense ratios for the three funds were 2.21% for the Growth Fund,
2.61% for the Aggressive Growth Fund and 2.52% for the Small Cap Growth Fund for
the year ended December 31, 2004. We expect the expense ratios to decline in
2005, although there can be no guarantee that they will. As we grow assets in
the Aggressive and Small Cap Growth Funds, we hope to reduce those expense
ratios down closer to the Growth Fund's historic expense level.
We think that the current economic trends still favor an up stock market in 2005
but the road is looking bumpy, given high equity valuations, ballooning trade
and fiscal budget deficits, and continued political and military uncertainty in
Iraq. One improving trend in the last six months has been U.S. job growth as
well as the fact that Corporate America is continuing to grow at a modest but
sustainable rate, which should bode well for 2005 and beyond.
Sincerely,
<Table>
- -s- Vincent E. Gallagher -s- James K. Kloppenburg
Vincent E. Gallagher James K. Kloppenburg
Portfolio Manager Portfolio Manager
</Table>
2
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND (UNAUDITED) TICKER: NEEGX
COMPARATIVE PERFORMANCE STATISTICS
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------
3 5 SINCE
BENCHMARKS 6 MONTHS(6) 1 YEAR(7) YEARS(8)(9) YEARS(8)(11) INCEPTION(8)(13)
--------------------------------- ------ ------ ------- -------- ------
Needham Growth Fund(1) 3.01% 6.20% 3.91%(10) 6.21%(12) 19.85%(14)
NASDAQ Composite Index(2) 6.56% 9.12% 4.20% (11.42%) 8.79%
S&P 500 Index(3) 7.19% 10.85% 3.58% (2.30%) 9.53%
S&P 400 Midcap Index(4) 9.81% 16.44% 10.51% 9.53% 14.53%
Russell 2000 Index(5) 10.90% 18.38% 11.52% 6.68% 9.87%
</Table>
1. Investment results calculated after reinvestment of dividends.
2. The NASDAQ Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market and Small Cap stocks.
3. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
4. The S&P 400 Midcap Index is a broad unmanaged measure of the U.S. stock
market.
5. The Russell 2000 Index is a broad unmanaged index composed of the smallest
2,000 companies in the Russell 3000 Index.
6. 7/1/04-12/31/04.
7. 1/1/04-12/31/04.
8. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
9. 1/1/02-12/31/04 (annualized return).
10. Total return for the three years was 12.20%, assuming all dividends were
reinvested in shares of the Fund.
11. 1/1/00-12/31/04 (annualized return).
12. Total return for the five years was 35.15%, assuming all dividends were
reinvested in shares of the Fund.
13. The inception date of the Fund was 1/1/96. 1/1/96-12/31/04 (annualized
return).
14. Total return since inception was 410.29%, assuming all dividends were
reinvested in shares of the Fund.
Note: The average annual returns shown in the above table and accompanying
footnotes are historical, reflect changes in share price and are net
of expenses. The table above does not reflect the deduction of taxes
that a shareholder would have paid on Fund distributions or on the
redemption of Fund shares. Investment results and the principal value
of an investment will vary. Past performance noted above does not
guarantee future results. When shares are redeemed, they may be worth
more or less than their original cost. Since inception, the Fund's
Adviser has absorbed certain expenses of the Fund, without which
returns would have been lower.
- -------------------------------------------------------------------------------
TOP TEN HOLDINGS*
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2004)
<Table>
<Caption>
- ----------------------------------------------------------
SECURITY
- ----------------------------------------- % OF
TOTAL
INVESTMENTS+
-----
1) Ceradyne, Inc. CRDN 5.29%
2) Talisman Energy, Inc. TLM 4.22%
3) Seagate Technology STX 3.75%
4) Motorola, Inc. MOT 3.74%
5) Scientific-Atlanta, Inc. SFA 3.44%
6) National Semiconductor Corp. NSM 3.43%
7) Comcast Corp. Class A CMCSA 2.89%
8) Thermo Electron Corp. TMO 2.73%
9) Kronos, Inc. KRON 2.67%
10) ConMed Corp. CNMD 2.47%
TOP TEN HOLDINGS = 34.63% OF TOTAL INVESTMENTS+
* Current portfolio holdings may not be
indicative of future portfolio
holdings.
+ Percentage of total investments
includes all stocks, fixed income
securities, options and warrants plus
cash minus all short positions.
- ----------------------------------------------------------
</Table>
SECTOR WEIGHTINGS
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2004)
<Table>
<Caption>
----------------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
-------------------------------------- ------ ------- ------
Healthcare/Medical
Devices/Pharmaceuticals 17.94% -- 17.94%
Cable/Entertainment/Media/Software 10.57% (1.17)% 9.40%
Energy/Industrial/Metals 22.03% (1.15)% 20.88%
Business Services/Consumer/Financial 8.47% (0.64)% 7.83%
Technology 24.50% -- 24.50%
Telecommunications 12.84% (1.98)% 10.86%
Miscellaneous & Options 1.79% -- 1.79%
Cash & Fixed Income Investments 6.80% -- 6.80%
(1) Percentage of total investments includes all stocks, fixed income
securities, options and warrants plus cash minus all short
positions.
(2) Total represents the difference between the long exposure and the
short exposure, which produces the net exposure.
----------------------------------------------------------------------
</Table>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
(LINE GRAPH)
<Table>
<Caption>
NEEDHAM GROWTH NASDAQ S&P 400 MIDCAP RUSSELL 2000
FUND COMPOSITE INDEX S&P 500 INDEX INDEX INDEX
-------------- --------------- ------------- -------------- ------------
Jan-96 10000 10000 10000 10000 10000
10850 10014 10260 10106 9962
12160 10472 10424 10538 10287
12570 10404 10455 10574 10481
13530 11246 10609 10898 11045
14430 11746 10883 11045 11489
14150 11194 10924 10879 11020
13800 10207 10442 10145 10058
14320 10783 10662 10731 10643
15070 11589 11262 11199 11058
15000 11538 11573 11231 10886
15281 12210 12448 11863 11333
Dec-96 15156 12195 12201 11877 11624
15752 13034 12963 12322 11854
15836 12365 13065 12221 11567
15909 11738 13082 12094 11241
15951 11742 12755 11772 10976
16662 13607 14173 13271 12465
16923 13982 14844 13685 12869
17886 15263 15719 14659 13402
18064 15441 15091 14976 13909
18600 16369 15882 15752 14761
17944 15512 15386 15147 14261
17754 15585 16098 15372 14164
Dec-97 17529 14723 15794 15339 13900
17893 15781 16555 15664 14199
19376 17259 17749 16961 15264
18732 17785 18551 17654 15787
19279 18231 18774 17688 15902
18769 17360 18522 17237 15135
19461 18251 19261 17221 14940
18732 18285 19069 16672 13938
15025 16017 17502 14475 11919
16666 17038 17824 15099 12277
18503 17316 18769 16160 12601
18649 19717 20397 17421 13411
Dec-98 21009 21157 20996 17788 13539
21945 24515 21934 18276 14279
20668 22391 21253 17319 13128
21714 23682 22036 17652 13197
22481 24900 22959 19207 14524
24001 24198 22417 19291 14738
26325 25010 22666 19691 14901
27176 25858 22922 19888 14975
27760 27043 23287 19445 14578
27590 26866 22083 18700 14072
26252 29090 23621 19316 14313
30610 33817 24577 20596 15345
Dec-99 37757 39924 25520 21537 16904
38784 38139 24234 20927 16626
49482 45046 23775 22391 19373
46229 44880 26100 24264 18099
45987 37894 25315 23415 17010
42335 31464 24795 23126 16017
47171 38942 25407 23466 17417
45659 35968 25010 23837 16873
52620 39702 26562 26497 18153
50052 36077 25160 26316 17615
48137 32205 25054 25423 16830
41861 28536 23080 23505 15103
Dec-00 40552 24281 23193 25303 16408
49540 27338 23786 25755 17138
44000 22244 21895 24755 16430
41207 18100 20417 22872 15530
45529 20419 22066 25222 16697
46151 22149 22532 26549 17568
47902 21273 21612 25880 17836
45807 19974 21303 25493 16810
43237 17779 20060 24661 16261
38063 14766 18441 21594 14075
41141 17429 19582 23358 15261
34153 19027 20233 24228 16054
Dec-01 45479 19593 20641 25774 17225
45414 19108 20141 25023 16635
43466 16778 19752 25053 16209
46360 17889 20495 26844 17512
43809 16369 19253 26719 17671
41681 15671 19112 26268 16888
37146 14197 17751 24346 16048
32513 12891 16367 21987 13625
32219 12765 16475 22098 13590
28764 11384 14686 20318 12615
30696 12919 15977 21198 13018
35427 14371 16917 22423 14179
Dec-02 32611 12986 15923 21502 13391
32448 12850 15507 20874 13025
32300 13023 15274 20376 12631
31760 13065 15422 20548 12794
33954 14268 16692 22038 14006
38407 15555 17570 23864 15508
39258 15823 17794 24168 15790
42025 16921 18108 25026 16777
44546 17663 18461 26159 17546
44841 17440 18265 25759 17273
47182 18873 19298 27706 18668
48279 19154 19467 28671 19331
Dec-03 48050 19584 20488 29155 19725
50865 20202 20864 29786 20583
50309 19856 21154 30502 20768
49114 19515 20835 30631 20961
46985 18794 20508 29626 19893
48246 19456 20789 30240 20212
49539 20061 21193 30927 21064
44366 18494 20490 29485 19647
42893 18025 20573 29407 19545
45021 18609 20795 30278 20462
45954 19379 21113 30762 20870
48753 20590 21967 32593 22685
Dec-04 51029 21376 22714 33957 23359
</Table>
The table above does not reflect the deduction of taxes that a shareholder
would have paid on Fund distributions or on the redemption of Fund shares.
Investment results and the principal value of an investment will vary. Past
performance noted above does not guarantee future results. When shares are
redeemed, they may be worth more or less than their original cost. Since
inception, the Fund's Adviser has absorbed certain expenses of the Fund,
without which returns would have been lower.
3
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND (UNAUDITED) TICKER: NEAGX
COMPARATIVE PERFORMANCE STATISTICS
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------
3 SINCE
BENCHMARKS 6 MONTHS(5) 1 YEAR(6) YEARS(7)(8) INCEPTION(7)(10)
--------------------------------------------------- ------ ------ ------- ------
Needham Aggressive Growth Fund(1) 8.71% 11.64% 5.41%(9) 8.60%(11)
S&P 500 Index(2) 7.19% 10.85% 3.58% 5.12%
NASDAQ Composite Index(3) 6.56% 9.12% 4.20% 8.46%
Russell 2000 Index(4) 10.90% 18.38% 11.52% 13.69%
</Table>
1. Investment results calculated after reinvestment of dividends.
2. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
3. The NASDAQ Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market and Small Cap stocks.
4. The Russell 2000 Index is a broad unmanaged index composed of the smallest
2,000 companies in the Russell 3000 Index.
5. 7/1/04-12/31/04.
6. 1/1/04-12/31/04.
7. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
8. 1/1/02-12/31/04 (annualized return).
9. Total return for the three years was 17.12%, assuming all dividends were
reinvested in shares of the Fund.
10. The inception date of the Fund was 9/4/01. 9/4/01-12/31/04 (annualized
return).
11. Total return since inception was 31.53%, assuming all dividends were
reinvested in shares of the Fund.
Note: The average annual returns shown in the above table and accompanying
footnotes are historical, reflect changes in share price and are net
of expenses. The table above does not reflect the deduction of taxes
that a shareholder would have paid on Fund distributions or on the
redemption of Fund shares. Investment results and the principal value
of an investment will vary. Past performance noted above does not
guarantee future results. When shares are redeemed, they may be worth
more or less than their original cost. Since inception, the Fund's
Adviser has absorbed certain expenses of the Fund, without which
returns would have been lower.
- -------------------------------------------------------------------------------
TOP TEN HOLDINGS*
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2004)
<Table>
<Caption>
- ----------------------------------------------------------
SECURITY
- ----------------------------------------- % OF
TOTAL
INVESTMENTS+
-----
1) Hyperion Solutions Corp. HYSL 3.29%
2) Precision Castparts Corp. PCP 3.09%
3) 51Job, Inc. JOBS 3.06%
4) Intuitive Surgical, Inc. ISRG 2.94%
5) Biogen Idec, Inc. BIIB 2.94%
6) Comcast Corp. Special Class A CMCSK 2.90%
7) Affiliated Computer Services, Inc. ACS 2.83%
8) PETCO Animal Supplies, Inc. PETC 2.79%
9) American Eagle Outfitters, Inc. AEOS 2.77%
10) ChoicePoint, Inc. CPS 2.71%
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
TOP TEN HOLDINGS = 29.32% OF TOTAL INVESTMENTS+
* Current portfolio holdings may not be
indicative of future portfolio
holdings.
+ Percentage of total investments
includes all stocks, fixed income
securities, options and warrants plus
cash minus all short positions.
- ----------------------------------------------------------
</Table>
SECTOR WEIGHTINGS
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2004)
<Table>
<Caption>
----------------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
-------------------------------------- ------ ------- --------
Healthcare/Medical
Devices/Pharmaceuticals 23.03% -- 23.03%
Energy & Industrial 6.02% -- 6.02%
Business Services & Financial 22.83% -- 22.83%
Consumer 15.34% -- 15.34%
Technology & Telecommunications 27.01% -- 27.01%
Miscellaneous & Options 0.01% -- 0.01%
Cash & Fixed Income Investments 5.76% -- 5.76%
(1) Percentage of total investments includes all stocks, fixed income
securities, options and warrants plus cash minus all short
positions.
(2) Total represents the difference between the long exposure and the
short exposure, which produces the net exposure.
----------------------------------------------------------------------
</Table>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
(LINE GRAPH)
<Table>
<Caption>
NEEDHAM AGGRESSIVE NASDAQ COMPOSITE
GROWTH FUND INDEX S&P 500 INDEX RUSSELL 2000 INDEX
------------------ ---------------- ------------- ------------------
Sep-01 10000 10000 10000 10000
9930 8467 9198 8682
10120 9549 9373 9191
10780 10910 10092 9903
Dec-01 11230 11026 10180 10515
11040 10937 10032 10407
10770 9794 9838 10122
11290 10442 10208 10936
11110 9555 9589 10350
10870 9147 9519 10546
Jun-02 10030 8287 8841 10022
9450 7525 8152 8508
9370 7451 8205 8486
8880 6645 7313 7877
9220 7541 7957 8129
10062 8802 8789 9289
Dec-02 9304 8030 8230 8795
9151 7871 8056 8532
8905 7976 7935 8274
9059 8172 8157 8476
9540 8560 8498 8937
10236 9527 9129 10159
Jun-03 10389 9706 9262 10353
10911 9752 9312 10808
11239 10819 9592 11495
11126 10713 9480 11227
11515 11560 10027 12231
11781 11732 10115 12665
Dec-03 11781 12015 10613 13015
12211 12374 10841 13485
12273 12162 10992 13606
12191 11747 10648 13323
11863 11512 10656 13032
11863 11917 10802 13242
Jun-04 12099 12041 10864 13597
11310 11328 10647 12872
11300 11080 10784 13001
11433 11671 10970 13690
11689 11870 10971 13674
12242 12642 11499 14800
Dec-04 13153 13093 11803 15305
</Table>
The table above does not reflect the deduction of taxes that a shareholder
would have paid on Fund distributions or on the redemption of Fund shares.
Investment results and the principal value of an investment will vary. Past
performance noted above does not guarantee future results. When shares are
redeemed, they may be worth more or less than their original cost. Since
inception, the Fund's Adviser has absorbed certain expenses of the Fund,
without which returns would have been lower.
4
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND (UNAUDITED) TICKER: NESGX
COMPARATIVE PERFORMANCE STATISTICS
<Table>
<Caption>
------------------------------------------------------------------------------------------------------------------
SINCE
BENCHMARKS 6 MONTHS(5) 1 YEAR(6) INCEPTION(7)(8)
------------------------------------------------------------ ------ ------ ------
Needham Small Cap Growth Fund(1) 3.12% 10.34% 26.78%(9)
S&P 500 Index(2) 7.19% 10.85% 6.23%
NASDAQ Composite Index(3) 6.56% 9.12% 11.45%
Russell 2000 Index(4) 10.90% 18.38% 12.72%
</Table>
1. Investment results calculated after reinvestment of dividends.
2. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
3. The NASDAQ Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market and Small Cap stocks.
4. The Russell 2000 Index is a broad unmanaged index composed of the smallest
2,000 companies in the Russell 3000 Index.
5. 7/1/04-12/31/04.
6. 1/1/04-12/31/04.
7. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
8. The inception date of the Fund was 5/22/02. 5/22/02-12/31/04 (annualized
return).
9. Total return since inception was 85.82%, assuming all dividends were
reinvested in shares of the Fund.
Note: The average annual returns shown in the above table and accompanying
footnotes are historical, reflect changes in share price and are net
of expenses. The table above does not reflect the deduction of taxes
that a shareholder would have paid on Fund distributions or on the
redemption of Fund shares. Investment results and the principal value
of an investment will vary. Past performance noted above does not
guarantee future results. When shares are redeemed, they may be worth
more or less than their original cost. Since inception, the Fund's
Adviser has absorbed certain expenses of the Fund, without which
returns would have been lower.
- -------------------------------------------------------------------------------
TOP TEN HOLDINGS*
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2004)
<Table>
<Caption>
- ----------------------------------------------------------
SECURITY
- ----------------------------------------- % OF
TOTAL
INVESTMENTS+
-----
1) Bright Horizons Family Solutions,
Inc. BFAM 7.63%
2) Ceradyne, Inc. CRDN 4.97%
3) Advisory Board Company ABCO 4.27%
4) Eon Labs, Inc. ELAB 4.17%
5) W.R. Berkley Corp. BER 3.64%
6) First Horizon Pharmaceutical Corp. FHRX 3.09%
7) CoStar Group, Inc. CSGP 3.03%
8) Argon ST, Inc. STST 3.01%
9) Aceto Corp. ACET 2.94%
10) PerkinElmer, Inc. PKI 2.82%
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
TOP TEN HOLDINGS = 39.57% OF TOTAL INVESTMENTS+
* Current portfolio holdings may not be
indicative of future portfolio
holdings.
+ Percentage of total investments
includes all stocks, fixed income
securities and options plus cash minus
all short positions.
- ----------------------------------------------------------
</Table>
SECTOR WEIGHTINGS
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2004)
<Table>
<Caption>
----------------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
-------------------------------------- ------ ------- --------
Healthcare/Medical
Devices/Pharmaceuticals 25.10% -- 25.10%
Cable/Entertainment/Media/Software 3.80% -- 3.80%
Energy/Industrial/Metals 16.82% -- 16.82%
Business Services/Consumer/Financial 28.42% -- 28.42%
Technology 17.14% -- 17.14%
Telecommunications 7.01% -- 7.01%
Miscellaneous & Options -- -- --
Cash & Fixed Income Investments 1.71% -- 1.71%
(1) Percentage of total investments includes all stocks, fixed income
securities and options plus cash minus all short positions.
(2) Total represents the difference between the long exposure and the
short exposure, which produces the net exposure.
----------------------------------------------------------------------
</Table>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
(LINE GRAPH)
<Table>
<Caption>
NEEDHAM SMALL CAP NASDAQ COMPOSITE
GROWTH FUND INDEX S & P 500 INDEX RUSSELL 2000 INDEX
----------------- ---------------- --------------- ------------------
May-02 10000 10000 10000 10000
9950 9656 9829 9872
Jun-02 9270 8748 9129 9382
8670 7943 8417 7965
8340 7866 8472 7944
7580 7015 7552 7374
8680 7960 8216 7610
11200 8855 8700 8289
Dec-02 10380 8001 8189 7828
10440 7918 7974 7614
9870 8024 7855 7384
9650 8050 7931 7479
10680 8791 8584 8188
12540 9584 9037 9066
Jun-03 13000 9765 9152 9231
14050 10427 9313 9808
14630 10962 9513 10263
15080 10854 9421 10024
16130 11713 9945 10920
16820 11887 10032 11307
Dec-03 16840 12175 10527 11620
17730 12538 10752 12040
17610 12323 10902 12148
17220 12494 10887 12536
16590 11664 10569 11636
17350 12075 10714 11823
Jun-04 18020 12201 10775 12140
16140 11478 10560 11493
15670 11226 10697 11608
16200 11826 10880 12223
16580 12027 10882 12208
17459 12809 11405 13214
Dec-04 18582 13267 11707 13665
</Table>
The table above does not reflect the deduction of taxes that a shareholder
would have paid on Fund distributions or on the redemption of Fund shares.
Investment results and the principal value of an investment will vary. Past
performance noted above does not guarantee future results. When shares are
redeemed, they may be worth more or less than their original cost. Since
inception, the Fund's Adviser has absorbed certain expenses of the Fund,
without which returns would have been lower.
5
DISCLOSURE OF FUND EXPENSES (UNAUDITED)
The following expense table is shown so that you can understand the impact of
fees on your investment. All mutual funds have operating expenses. As a
shareholder of the fund, you incur ongoing costs, which include costs for
portfolio management, administrative services, and shareholder reports, among
others. A fund's expenses are expressed as a percentage of its average net
assets. This figure is known as the expense ratio. The following examples are
intended to help you understand the ongoing fees (in dollars) of investing in
the fund and to compare these costs with those of other mutual funds. The
examples are based on an investment of $1,000 made at the beginning of the
period shown and held for the entire period.
The expense table below illustrates your fund's costs in two ways.
- - ACTUAL FUND RETURN. This section helps you to estimate the actual expenses
after fee waivers that you paid over the period. The "Ending Account Value"
shown is derived from the fund's actual return, and "Expenses Paid During
Period" shows the dollar amount that would have been paid by an investor who
started with $1,000 in the fund. You may use the information here, together
with the amount you invested, to estimate the expenses that you paid over the
period. To do so, simply divide your account value by $1,000 (for example, a
$7,500 account value divided by $1,000=7.5), then multiply the result by the
number given for your fund under the heading "Expenses Paid During Period."
- - HYPOTHETICAL 5% RETURN. This section is intended to help you compare your
fund's costs with those of other mutual funds. It assumes that the fund had a
return of 5% before expenses during the period shown, but that the expense
ratio is unchanged. In this case - because the return used is not the fund's
actual return - the results do not apply to your investment. The example is
useful in making comparisons because the Securities and Exchange Commission
requires all mutual funds to calculate expenses based on a 5% return. You can
assess your fund's cost by comparing this hypothetical example with the
hypothetical examples that appear in shareholders reports of other funds.
Please note that the expenses shown in the tables are meant to highlight and
help you compare ongoing costs only and do not reflect any transactional costs
(if any). The "Annualized Expense Ratio" represents the actual expenses for the
six month period indicated and may be different from the expense ratio in the
Financial Highlights which is for the year ended December 31, 2004.
FOR THE PERIOD JULY 1, 2004 TO DECEMBER 31, 2004
Expense Table
<Table>
<Caption>
Beginning Ending Expenses
Account Account Annualized Paid
Value Value Expense During
7/01/04 12/31/04 Ratio Period*
- --------------------------------------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
- --------------------------------------------------------------------------------------------------------------
Actual Fund Return $1,000.00 $1,030.10 2.80% $14.29
Hypothetical 5% Return $1,000.00 $1,010.92 2.80% $14.15
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
- --------------------------------------------------------------------------------------------------------------
Actual Fund Return $1,000.00 $1,087.10 2.72% $14.27
Hypothetical 5% Return $1,000.00 $1,011.33 2.72% $13.75
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------------------------------------
Actual Fund Return $1,000.00 $1,031.20 2.54% $12.97
Hypothetical 5% Return $1,000.00 $1,012.23 2.54% $12.85
</Table>
* Expenses are equal to the fund's annualized expense ratio multiplied by the
average account value over the period, multiplied by the number of days in the
most recent fiscal half-year, then divided by 366.
6
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Investments
December 31, 2004
<Table>
<Caption>
Shares Value
COMMON STOCK - (91.9%)
BIOTECH & PHARMACEUTICALS -
(5.1%)
Johnson & Johnson 100,000 $ 6,342,000
Merck & Co., Inc. 150,000 4,821,000
Schering-Plough Corp. 162,000 3,382,560
---------------
14,545,560
---------------
BUSINESS SERVICES - (4.1%)
Affiliated Computer
Services, Inc. Class A* 45,000 2,708,550
BISYS Group, Inc.* 77,500 1,274,875
Choicepoint, Inc.* 25,000 1,149,750
First Data Corp. 50,000 2,127,000
Iron Mountain, Inc.* 150,000 4,573,500
---------------
11,833,675
---------------
CABLE TV & EQUIPMENT - (2.9%)
Comcast Corp. Class A*+ 250,000 8,320,000
---------------
COMPUTER HARDWARE - (1.2%)
Planar Systems, Inc.* 300,000 3,369,000
---------------
CONTRACT MANUFACTURING &
MATERIALS - (2.4%)
Benchmark Electronics,
Inc.* 75,000 2,557,500
Merix Corp.* 150,000 1,728,000
Parlex Corp.* 200,000 1,500,000
Pemstar, Inc.* 640,000 1,158,400
---------------
6,943,900
---------------
ELECTRONIC COMPONENTS &
DISTRIBUTION - (1.4%)
Ceva, Inc.* 135,675 1,235,592
Interlink Electronics,
Inc.* 70,000 662,200
Vishay Intertechnology,
Inc.* 150,000 2,253,000
---------------
4,150,792
---------------
ELECTRONICS &
STORAGE - (5.2%)
Bell Microproducts, Inc.* 100,000 962,000
Datalink Corporation* 280,000 820,400
Datalink Corporation (PP)* 400,000 1,172,000
Komag, Inc.* 60,000 1,126,800
Seagate Technology Holdings 625,000 10,793,750
---------------
14,874,950
---------------
ELECTRONICS, ELECTRICAL
EQUIPMENT, &
INSTRUMENTATION - (0.3%)
Color Kinetics, Inc.* 47,600 836,808
---------------
</Table>
<Table>
<Caption>
Shares Value
EXPLORATION, PRODUCTION,
REFINING & STORAGE - (6.5%)
Chesapeake Energy Corp. 400,000 $ 6,600,000
Talisman Energy, Inc. 450,000 12,132,000
---------------
18,732,000
---------------
HEALTHCARE SERVICES - (1.2%)
HCA Inc. 85,000 3,396,600
---------------
INDUSTRIAL CHEMICALS, RESINS
& LAMINATES - (2.0%)
AXT, Inc.* 367,202 580,179
Park Electrochemical Corp. 185,000 4,010,800
Southwall Technologies,
Inc.* 728,000 1,252,160
---------------
5,843,139
---------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (7.2%)
Ceradyne, Inc. (PP)* 265,951 15,215,057
Intevac, Inc.* 242,500 1,833,300
Sypris Solutions, Inc.+ 231,000 3,536,610
---------------
20,584,967
---------------
MEDICAL DEVICES & SUPPLIES -
(10.8%)
Analogic Corp. 115,000 5,150,850
Closure Medical Corp.* 100,000 1,950,000
ConMed Corp.* 250,000 7,105,000
Cutera, Inc.* 115,000 1,435,200
Thermo Electron Corp.* 260,000 7,849,400
Viasys Healthcare, Inc.* 150,000 2,850,000
Waters Corp.* 70,000 3,275,300
Zoll Medical Corp.* 47,300 1,627,120
---------------
31,242,870
---------------
NETWORKING & COMMUNICATIONS
EQUIPMENT - (0.4%)
Lucent Technologies, Inc.* 300,000 1,128,000
---------------
OIL/GAS EQUIPMENT &
SERVICES - (2.9%)
GlobalSantaFe Corp. 195,000 6,456,450
Offshore Logistics, Inc.* 56,300 1,828,061
---------------
8,284,511
---------------
OPTICAL COMPONENTS - (2.8%)
Agere Systems, Inc. Class
B* 1,000,000 1,350,000
Newport Corp.* 250,000 3,525,000
Orbotech Ltd.* 150,000 3,175,500
---------------
8,050,500
---------------
</Table>
See accompanying notes to financial statements.
7
NEEDHAM GROWTH FUND
Schedule of Investments (Continued)
December 31, 2004
Needham Funds
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
SEMICONDUCTOR CAPITAL
EQUIPMENT - (5.3%)
Brooks Automation, Inc.* 213,400 $ 3,674,748
FSI International, Inc.* 331,000 1,545,770
FSI International, Inc.
(PP)* 150,000 700,500
Helix Technology Corp. 175,341 3,049,180
MKS Instruments, Inc.* 134,100 2,487,555
Nova Measuring Instruments
Ltd.* 40,000 137,600
Photronics, Inc.* 225,000 3,712,500
---------------
15,307,853
---------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES -
(7.2%)
Actel Corp.* 95,000 1,666,300
Atmel Corp.* 750,000 2,940,000
Freescale Semiconductor,
Inc. Class B* 69,009 1,267,005
MEMC Electronic Materials,
Inc.* 200,000 2,650,000
National Semiconductor
Corp. 550,000 9,872,500
Standard Microsystems
Corp.* 121,350 2,163,671
---------------
20,559,476
---------------
SOFTWARE - (7.2%)
Aspen Technology, Inc.* 300,000 1,863,000
Computer Associates
International, Inc. 154 4,783
Hyperion Solutions Corp.* 110,000 5,128,200
Kronos, Inc.*+ 150,000 7,669,500
Phoenix Technologies Ltd.* 300,000 2,478,000
SPSS, Inc.* 225,000 3,519,000
---------------
20,662,483
---------------
SPECIALTY RETAILING &
MANUFACTURING - (4.0%)
Brookstone, Inc.* 187,500 3,665,625
Carmax, Inc.* 185,000 5,744,250
West Marine, Inc.* 80,000 1,980,000
---------------
11,389,875
---------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (3.8%)
ADC Telecommunications,
Inc.* 360,000 964,800
Scientific-Atlanta, Inc. 300,000 9,903,000
---------------
10,867,800
---------------
</Table>
<Table>
<Caption>
Shares Value
WIRELESS COMMUNICATIONS &
EQUIPMENT - (8.0%)
Anaren, Inc.*+ 250,000 $ 3,240,000
EMS Technologies, Inc.* 76,900 1,278,078
EMS Technologies, Inc.
(PP)* 100,000 1,662,000
Motorola, Inc.+ 625,000 10,750,000
REMEC, Inc.* 300,000 2,163,000
Viasat, Inc.* 169,000 4,101,630
---------------
23,194,708
---------------
TOTAL COMMON STOCK (Cost
$194,356,226) 264,119,467
---------------
---------------
INVESTMENT TRUSTS - (1.7%)
H & Q Healthcare Investors
Fund 158,496 2,897,307
H & Q Life Sciences
Investors Fund 118,267 1,874,532
---------------
TOTAL INVESTMENT TRUSTS (Cost
$4,702,699) 4,771,839
---------------
---------------
PREFERRED STOCK - (0.0%)
CABLE TV & EQUIPMENT - (0.0%)
Adelphia Communications
Corp. - Convertible
Preferred Stock 7.50%,
11/15/04, Series E* 182,000 91,000
---------------
TOTAL PREFERRED STOCK (Cost
$2,554,580) 91,000
---------------
---------------
<Caption>
Par
CONVERTIBLE BONDS - (3.4%)
NETWORKING & COMMUNICATIONS
EQUIPMENT - (2.3%)
Lucent Technologies, Inc.,
8.00%, 08/01/31 6,000,000 6,675,000
---------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (1.0%)
Nortel Telecommunications,
4.25%, 09/01/08 3,000,000 2,917,500
---------------
TOTAL CONVERTIBLE BONDS (Cost
$8,937,596) 9,592,500
---------------
---------------
</Table>
See accompanying notes to financial statements.
8
NEEDHAM GROWTH FUND
Schedule of Investments (Continued)
December 31, 2004
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
<Table>
!Shares
TEMPORARY INVESTMENTS - (3.1%)
Provident Institutional Fund -
Tempcash Portfolio 9,007,193 $ 9,007,193
----------------
TOTAL TEMPORARY INVESTMENTS (Cost
$9,007,193) 9,007,193
----------------
----------------
TOTAL INVESTMENTS - (100.1%)
(Cost $219,558,294) 287,581,999
----------------
----------------
WARRANTS - (0.0%)
NAME/EXPIRATION DATE/STRIKE PRICE
ELECTRONICS & STORAGE - (0.0%)
Datalink Corp., May 07, $4.50* 68,000 37,351
----------------
</Table>
<Table>
<Caption>
Shares Value
ELECTRONICS, ELECTRICAL
EQUIPMENT, &
INSTRUMENTATION - (0.0%)
Robotic Vision Systems,
Inc., May 05, $7.50* 55,137 $ 0
---------------
TOTAL WARRANTS(Cost $162,175) 37,351
---------------
---------------
TOTAL INVESTMENTS AND
WARRANTS - (100.1%) 287,619,350
---------------
---------------
(Cost $219,720,469)(x)
Total Securities Sold
Short - (-4.7%) (13,562,920)
---------------
---------------
Other Assets, Less Other
Liabilities - (4.6%) 13,315,630
---------------
NET ASSETS - (100.0%) $ 287,372,060
---------------
---------------
---------------
---------------
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
(x)The cost for federal income tax purposes is $220,038,728.
PP Private placement. Securities are exempt from registration under Rule 144 of
the Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration. At
December 31, 2004, the aggregate value of Rule 144 securities amounted to
approximately $18,750,000, which represents 6.5% of net assets as of that
date.
See accompanying notes to financial statements.
9
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Securities Sold Short
December 31, 2004
<Table>
<Caption>
Shares Value
SECURITIES SOLD
SHORT - (-4.7%)
EDA/CAD - CAM/INTELLECTUAL
PROPERTY - (-0.6%)
Ansys, Inc.* 52,000 $ 1,667,120
---------------
FINANCIAL SERVICES - (-0.6%)
Lehman Brothers Holdings,
Inc.* 20,000 1,749,600
---------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (-1.1%)
Polaris Industries, Inc.* 30,000 2,040,600
Zebra Technologies Corp.* 20,000 1,125,600
---------------
3,166,200
---------------
</Table>
<Table>
<Caption>
Shares Value
NETWORKING & COMMUNICATIONS
EQUIPMENT - (-1.9%)
Juniper Networks, Inc.* 200,000 $ 5,438,000
---------------
SOFTWARE - (-0.5%)
Electronic Arts, Inc.* 25,000 1,542,000
---------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $7,230,222) 13,562,920
---------------
---------------
TOTAL SECURITIES SOLD SHORT -
(-4.7%) (13,562,920)
---------------
---------------
Total Investments and
Warrants - (100.1%) 287,619,350
---------------
---------------
Other Assets, Less Other
Liabilities - (4.6%) 13,315,630
---------------
NET ASSETS - (100.0%) $ 287,372,060
---------------
---------------
---------------
---------------
</Table>
* Non-income producing security.
See accompanying notes to financial statements.
10
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Investments
December 31, 2004
<Table>
<Caption>
Shares Value
COMMON STOCK - (94.6%)
AIRLINES - (2.0%)
Jetblue Airways Corp.* 15,000 $ 348,300
--------------
BIOTECH & PHARMACEUTICALS -
(4.2%)
Biogen Idec, Inc.* 7,500 499,575
Gilead Sciences, Inc.* 6,000 209,940
--------------
709,515
--------------
BUSINESS SERVICES - (20.3%)
51Job, Inc.* (ADR) 10,000 519,700
Affiliated Computer
Services, Inc. Class A* 8,000 481,520
Alliance Data Systems Corp.* 5,000 237,400
Choicepoint, Inc.* 10,000 459,900
Digitas, Inc.* 40,000 382,000
First Data Corp. 7,500 319,050
Getty Images, Inc.* 6,000 413,100
Iron Mountain, Inc.* 15,000 457,350
Portfolio Recovery
Associates, Inc.* 5,000 206,100
--------------
3,476,120
--------------
CABLE TV & EQUIPMENT - (2.9%)
Comcast Corp. Special Class
A* 15,000 492,600
--------------
ELECTRONIC COMPONENTS &
DISTRIBUTION - (2.4%)
Ceva, Inc.* 44,170 402,256
--------------
ELECTRONICS & STORAGE - (0.4%)
Datalink Corporation (PP)* 25,000 73,250
--------------
EXPLORATION, PRODUCTION,
REFINING & STORAGE - (1.0%)
XTO Energy, Inc. 5,000 176,900
--------------
FINANCIAL SERVICES - (2.5%)
Advance America, Cash
Advance Centers, Inc.* 1,250 28,625
State Street Corp. 8,000 392,960
--------------
421,585
--------------
HEALTHCARE SERVICES - (6.4%)
Community Health Systems,
Inc.* 15,000 418,200
Express Scripts, Inc.* 6,000 458,640
United Surgical Partners
Intl, Inc.* 5,000 208,500
--------------
1,085,340
--------------
</Table>
<Table>
<Caption>
Shares Value
INDUSTRIAL CHEMICALS, RESINS &
LAMINATES - (1.9%)
Park Electrochemical Corp. 15,000 $ 325,200
--------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (3.1%)
Precision Castparts Corp. 8,000 525,440
--------------
MEDICAL DEVICES & SUPPLIES -
(12.6%)
Animas, Corp.* 20,000 312,600
Epix Pharmaceuticals, Inc.* 15,000 268,650
Guidant Corp. 5,000 360,500
Intuitive Surgical, Inc.* 12,500 500,250
Kyphon, Inc.* 12,500 322,000
Medtronic, Inc. 7,500 372,525
--------------
2,136,525
--------------
OPTICAL COMPONENTS - (1.5%)
Orbotech Ltd.* 12,000 254,040
--------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (3.6%)
FSI International, Inc.* 35,000 163,450
Helix Technology Corp. 20,000 347,800
Staktek Holdings, Inc.* 20,000 92,800
--------------
604,050
--------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES - (2.0%)
Intersil Holding Corp. 20,000 334,800
--------------
SOFTWARE - (13.0%)
Callidus Software, Inc.* 10,000 58,900
Hyperion Solutions Corp.* 12,000 559,440
Kronos, Inc.* 7,500 383,475
Navteq Corp.* 4,000 185,440
Pervasive Software, Inc.* 50,000 242,500
Plumtree Software, Inc.* 65,000 293,800
Rightnow Technologies, Inc.* 15,000 242,250
WebEx Communications, Inc.* 10,000 237,800
--------------
2,203,605
--------------
SPECIALITY RETAILING &
MANUFACTURING - (10.5%)
American Eagle Outfitters,
Inc. 10,000 471,000
Carmax, Inc.* 12,500 388,125
Pacific Sunwear of
California, Inc.* 20,000 445,200
PETCO Animal Supplies, Inc.* 12,000 473,760
--------------
1,778,085
--------------
</Table>
See accompanying notes to financial statements.
11
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Investments (Continued)
December 31, 2004
<Table>
<Caption>
Shares Value
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (1.9%)
Scientific-Atlanta, Inc. 10,000 $ 330,100
--------------
WIRELESS COMMUNICATIONS &
EQUIPMENT - (2.4%)
EMS Technologies, Inc.* 10,000 166,200
Viasat, Inc.* 10,000 242,700
--------------
408,900
--------------
TOTAL COMMON STOCK (Cost
$12,136,032) 16,086,611
--------------
TEMPORARY INVESTMENTS - (5.8%)
Provident Institutional
Fund - Tempcash Portfolio 126,210 126,210
The RBB Sansom Street Money
Market Portfolio 855,672 855,672
--------------
TOTAL TEMPORARY INVESTMENTS
(Cost $981,882) 981,882
--------------
TOTAL INVESTMENTS - (100.4%)
(Cost $13,117,914) 17,068,493
--------------
--------------
</Table>
<Table>
<Caption>
Shares Value
WARRANTS - (0.0%)
NAME/EXPIRATION DATE/STRIKE
PRICE
ELECTRONICS & STORAGE - (0.0%)
Datalink Corp., May 07,
$4.50* 4,000 $ 2,197
--------------
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(0.0%)
Robotic Vision Systems,
Inc., May 05, $7.50* 4,135 0
--------------
TOTAL WARRANTS (Cost $11,591) 2,197
--------------
--------------
TOTAL INVESTMENTS AND
WARRANTS - (100.4%)
(Cost $13,129,505)(x) 17,070,690
--------------
--------------
Liabilities, Less Other
Assets - (-0.4%) (70,205)
--------------
NET ASSETS - (100.0%) $ 17,000,485
--------------
--------------
--------------
--------------
</Table>
*Non-income producing security.
(x)The cost for federal income tax purposes is $13,129,505.
PP Private placement. Securities are exempt from registration under Rule 144
of the Securities Act of 1933. Such securities may be resold, normally to
institutional buyers, in transactions exempt from registration. At December
31, 2004, the aggregate value of Rule 144 securities amounted to
approximately $73,000, which represents approximately less than 1% of net
assets as of that date.
ADR American Depository Receipt.
See accompanying notes to financial statements.
12
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Investments
December 31, 2004
<Table>
<Caption>
Shares Value
COMMON STOCK - (98.8%)
BIOTECH & PHARMACEUTICALS -
(9.2%)
Eon Labs, Inc.* 40,000 $ 1,080,000
First Horizon Pharmaceutical
Corp.* 35,000 801,150
Martek Biosciences
Corporation* 10,000 512,000
--------------
2,393,150
--------------
BUSINESS SERVICES - (20.9%)
Advisory Board Company* 30,000 1,106,400
Bright Horizons Family
Solutions, Inc.* 30,500 1,975,180
Copart, Inc.* 15,000 394,800
Costar Group, Inc.* 17,000 785,060
Digitas, Inc.* 30,000 286,500
Iron Mountain, Inc.* 20,000 609,800
Sitel Corp.* 110,000 270,600
--------------
5,428,340
--------------
COMPUTER HARDWARE - (1.1%)
Planar Systems, Inc.* 25,000 280,750
--------------
CONTRACT MANUFACTURING &
MATERIALS - (1.5%)
Pemstar, Inc.* 217,300 393,313
--------------
ELECTRONIC COMPONENTS &
DISTRIBUTION - (0.9%)
Ceva, Inc.* 26,900 244,978
--------------
ELECTRONICS & STORAGE - (1.4%)
Datalink Corporation* 57,000 167,010
Dataram Corp.* 30,000 190,800
--------------
357,810
--------------
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(3.4%)
Cognex Corp. 6,000 167,400
Color Kinetics, Inc.* 5,300 93,174
Garmin Ltd. 10,000 608,400
--------------
868,974
--------------
EXPLORATION, PRODUCTION,
REFINING & STORAGE - (1.3%)
Chesapeake Energy Corp. 20,000 330,000
--------------
</Table>
<Table>
<Caption>
Shares Value
FINANCIAL SERVICES - (6.6%)
Advance America, Cash
Advance Centers, Inc.* 2,000 $ 45,800
Berkshire Hathaway, Inc.
Class B* 100 293,600
Brantley Capital Corp.* 12,500 145,500
Factset Research Systems
Inc. 5,000 292,200
W.R. Berkley Corp. 20,000 943,400
--------------
1,720,500
--------------
GOVERNMENT IT - (4.6%)
Argon St, Inc.* 22,000 779,900
Integral Systems, Inc. 21,000 408,450
--------------
1,188,350
--------------
HEALTHCARE SERVICES - (1.1%)
Health Extras, Inc.* 17,500 285,250
--------------
INDUSTRIAL CHEMICALS, RESINS &
LAMINATES - (2.9%)
Aceto Corp. 40,000 761,600
--------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (9.0%)
Ceradyne, Inc. (PP)* 22,500 1,287,225
Innovative Solutions and
Support, Inc.* 15,000 500,400
Intevac, Inc.* 37,500 283,500
Sypris Solutions, Inc. 17,000 260,270
--------------
2,331,395
--------------
MEDICAL DEVICES & SUPPLIES -
(14.9%)
Analogic Corp. 12,200 546,438
Cantel Medical Corp.* 18,000 673,560
Cutera, Inc.* 20,000 249,600
Exactech, Inc.* 10,000 182,900
Immucor, Inc.* 30,000 705,300
Intermagnetics General
Corp.* 15,000 381,150
PerkinElmer, Inc. 32,500 730,925
Zoll Medical Corp.* 11,100 381,840
--------------
3,851,713
--------------
OPTICAL COMPONENTS - (0.5%)
Excel Technology, Inc.* 4,500 117,000
--------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (4.6%)
Brooks Automation, Inc.* 4,000 68,880
FSI International, Inc.* 44,568 208,133
MKS Instruments, Inc.* 30,000 556,500
Therma-Wave, Inc. (PP)* 100,000 346,000
--------------
1,179,513
--------------
</Table>
See accompanying notes to financial statements.
13
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Investments (Continued)
December 31, 2004
<Table>
<Caption>
Shares Value
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES - (0.9%)
Standard Microsystems Corp.* 12,500 $ 222,875
--------------
SOFTWARE - (3.8%)
Mobius Management Systems,
Inc.* 14,000 101,556
National Instruments Corp. 18,000 490,500
Skillsoft PLC* 70,000 395,500
--------------
987,556
--------------
SPECIALITY RETAILING &
MANUFACTURING - (1.0%)
West Marine, Inc.* 10,000 247,500
--------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (2.1%)
Ixia* 25,000 420,250
Mobility Electronics, Inc.* 15,000 128,700
--------------
548,950
--------------
TRANSPORTATION - (2.2%)
Genesee And Wyoming, Inc.* 19,900 559,787
--------------
</Table>
<Table>
<Caption>
Shares Value
WIRELESS COMMUNICATIONS &
EQUIPMENT - (4.9%)
Anaren, Inc.* 17,500 $ 226,800
GoRemote Internet
Communications, Inc.* 90,000 187,200
REMEC, Inc.* 40,000 288,400
Tessco Technologies, Inc.* 15,000 209,850
Viasat, Inc.* 15,000 364,050
--------------
1,276,300
--------------
TOTAL COMMON STOCK (Cost
$17,270,963) 25,575,604
--------------
--------------
TEMPORARY INVESTMENTS - (1.7%)
The RBB Sansom Street Money
Market Portfolio 442,266 442,266
--------------
TOTAL TEMPORARY INVESTMENTS
(Cost $442,266) 442,266
--------------
TOTAL INVESTMENTS - (100.5%) 26,017,870
--------------
--------------
(Cost $17,713,229)(x)
Liabilities, Less Other
Assets - (-0.5%) (122,549)
--------------
NET ASSETS - (100.0%) $ 25,895,321
--------------
--------------
</Table>
* Non-income producing security.
(x)The cost for federal income tax purposes is $17,835,101.
PP Private placement. Securities are exempt from registration under Rule 144 of
the Securities Act of 1933. Such securities may be resold, normally to
institutional buyers, in transactions exempt from registration. At December
31, 2004, the aggregate value of Rule 144 securities amounted to
approximately $1,633,000, which represents approximately 6.3% of net assets
as of that date.
See accompanying notes to financial statements.
14
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 2004
<Table>
<Caption>
NEEDHAM NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- ---------------------------------------------------------------------------------------------------------------------
ASSETS:
- ---------------------------------------------------------------------------------------------------------------------
Investments, at Value (Cost $219,558,294, $13,117,914 and
$17,713,229, respectively) $287,581,999 $17,068,493 $26,017,870
Warrants, at Value (Cost $162,175, $11,591 and $0,
respectively) 37,351 2,197 --
Cash 50,148 2,275 3,376
Receivables:
Due from Brokers 13,800,855 -- --
Dividends and Interest 407,981 3,899 10,577
Fund Shares Sold 196,593 -- 1,250
Prepaid Expenses and Other Assets 19,955 8,802 5,661
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 302,094,882 17,085,666 26,038,734
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------------------------
Securities Sold Short, at Value (Proceeds $7,230,222, $0
and $0, respectively) 13,562,920 -- --
Payables:
Investment Securities Purchased -- -- 10,114
Fund Shares Redeemed 652,049 -- 22,514
Due to Adviser 301,864 21,549 45,475
Accrued Expenses and Other Liabilities 205,989 63,632 65,310
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 14,722,822 85,181 143,413
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS $287,372,060 $17,000,485 $25,895,321
- ---------------------------------------------------------------------------------------------------------------------
Shares Issued and Outstanding $.001 Par Value (Authorized
800,000,000, 100,000,000 and 100,000,000, respectively) 9,220,237 1,322,980 1,397,236
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $31.17 $12.85 $18.53
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
Paid-in Capital 267,163,346 13,227,177 18,247,611
Accumulated Net Realized Gain (Loss) (41,357,469) (167,877) (656,931)
Net Unrealized Appreciation (Depreciation) of Investment
Securities, Warrants and Securities Sold Short 61,566,183 3,941,185 8,304,641
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $287,372,060 $17,000,485 $25,895,321
- ---------------------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
15
Needham Funds
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 2004
<Table>
<Caption>
NEEDHAM NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------------------
Dividends $ 1,416,189 $ 41,080 $ 138,514
Interest 840,594 19,665 14,784
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 2,256,783 60,745 153,298
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
- ----------------------------------------------------------------------------------------------------------------
Investment Advisory Fees 4,054,328 210,574 315,474
Distribution Fees 809,642 41,914 63,107
Administration and Accounting Fees 293,250 85,000 85,000
Custodian Fees 48,146 18,500 25,858
Legal Fees 106,797 38,524 39,601
Shareholders' Reports 101,608 9,702 15,208
Directors' Fees 39,006 2,014 2,996
Transfer Agent Fees 30,000 30,000 30,000
Audit Fees 44,867 32,566 32,167
Filing Fees 26,665 20,362 21,636
Insurance Expense 26,757 1,614 2,853
Interest Expense 1,242,498 17,864 5,025
Dividend Expense 138,397 -- 300
Other Expenses 191,915 21,985 23,435
- ----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 7,153,876 530,619 662,660
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
LESS: FEES WAIVED AND/OR EXPENSES REIMBURSED (NOTE 3) -- (91,605) (27,175)
- ----------------------------------------------------------------------------------------------------------------
NET EXPENSES 7,153,876 439,014 635,485
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (4,897,093) (378,269) (482,187)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT
SECURITIES, OPTION CONTRACTS, WARRANTS AND SECURITIES SOLD
SHORT
- ----------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investment Securities and
Warrants 13,637,854 489,748 (612,078)
Net Realized Loss on Option Contracts (1,322,357) -- --
Change in Unrealized Appreciation (Depreciation) of
Investment Securities, Option Contracts, Warrants and
Securities Sold Short 5,600,561 1,639,704 3,227,072
- ----------------------------------------------------------------------------------------------------------------
NET GAIN 17,916,058 2,129,452 2,614,994
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $13,018,965 $1,751,183 $2,132,807
- ----------------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
16
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<Table>
<Caption>
NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
NEEDHAM GROWTH FUND GROWTH FUND GROWTH FUND
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2004 2003 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investment Loss $ (4,897,093) $ (4,227,706) $ (378,269) $ (340,019) $ (482,187) $ (221,052)
Net Realized Gain (Loss) on Investment
Securities and Warrants 13,637,854 (2,903,611) 489,748 (353,954) (612,078) 433,462
Net Realized Loss on Option Contracts (1,322,357) (5,940,155) -- -- -- --
Change in Unrealized Appreciation
(Depreciation) of Investment
Securities, Option Contracts,
Warrants and Securities Sold Short 5,600,561 129,463,632 1,639,704 4,137,165 3,227,072 5,036,679
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 13,018,965 116,392,160 1,751,183 3,443,192 2,132,807 5,249,089
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- -- -- -- --
Net Short-Term Gains -- -- -- -- -- --
Net Long-Term Gains -- -- -- -- (68,474) --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- (68,474) --
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL TRANSACTIONS (1):
- ---------------------------------------------------------------------------------------------------------------------------------
Shares Issued 58,898,114 123,340,785 1,013,413 2,984,396 19,549,157 36,534,339
Contribution by Adviser 417,668 -- -- -- -- --
Shares Issued in Reinvestment of
Distributions -- -- -- -- 67,806 --
Shares Redeemed (149,282,839) (139,987,612) (3,482,785) (2,982,016) (23,401,507) (18,736,691)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Transactions (89,967,057) (16,646,827) (2,469,372) 2,380 (3,784,544) 17,797,648
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS (76,948,092) 99,745,333 (718,189) 3,445,572 (1,720,211) 23,046,737
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
Beginning of Period 364,320,152 264,574,819 17,718,674 14,273,102 27,615,532 4,568,795
End of Period $ 287,372,060 $ 364,320,152 $17,000,485 $17,718,674 $ 25,895,321 $ 27,615,532
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
- ---------------------------------------------------------------------------------------------------------------------------------
Number of Shares Issued 1,976,467 5,075,842 85,122 270,519 1,129,912 2,421,448
Number of Shares Reinvested -- -- -- -- 3,938 --
Number of Shares Redeemed (5,170,870) (5,941,281) (301,518) (300,480) (1,376,108) (1,222,102)
- ---------------------------------------------------------------------------------------------------------------------------------
(3,194,403) (865,439) (216,396) (29,961) (242,258) 1,199,346
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
17
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Financial Highlights
<Table>
<Caption>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
(For a Share Outstanding Throughout each Period) 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 29.35 $ 19.92 $ 27.78 $ 24.77 $ 26.47
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investment Loss (0.84) (0.38) (0.25) (0.29) (0.12)
Net Realized and Unrealized Gains (Losses) 2.62 9.81 (7.61) 3.30 2.57
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.78 9.43 (7.86) 3.01 2.45
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution by Adviser 0.04 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- -- -- --
Net Realized Gains -- -- -- -- (4.15)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- (4.15)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 31.17 $ 29.35 $ 19.92 $ 27.78 $ 24.77
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 6.20% 47.34% (28.29)% 12.15% 7.40%
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $287,372 $364,320 $264,575 $348,387 $76,070
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.21% 2.16% 1.92% 1.94%(1) 2.19%(1)
Ratio of Expenses to Average Net Assets (excluding
interest and dividend expense) 1.78% 1.77% 1.75% 1.87% 2.19%
Ratio of Net Investment Loss to Average Net Assets (1.51)% (1.38)% (1.01)% (1.04)% (1.07)%
Portfolio Turnover Rate 15% 42% 78% 150% 187%
</Table>
(1)
Unaudited
See accompanying notes to financial statements.
18
ANNUAL
REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Financial Highlights
<Table>
<Caption>
Year Ended Year Ended Year Ended September 4, to
(For a Share Outstanding December 31, December 31, December 31, December 31,
Throughout each Period) 2004 2003 2002 2001**
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 11.51 $ 9.09 $ 11.23 $ 10.00
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net Investment Loss (0.36) (0.23) (0.17) (0.03)
Net Realized and Unrealized Gains (Losses) 1.70 2.65 (1.76) 1.26
- -----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.34 2.42 (1.93) 1.23
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- -- --
Net Realized Gains -- -- (0.21) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- (0.21) --
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 12.85 $ 11.51 $ 9.09 $ 11.23
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 11.64% 26.62% (17.15)% 12.30%#
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $17,000 $17,719 $14,273 $13,178
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.61% 2.52% 2.51% 2.57%(1)*
Ratio of Expenses to Average Net Assets (excluding interest
and dividend expense) 2.50% 2.50% 2.50% 2.50%*
Ratio of Expenses to Average Net Assets (excluding waivers
and reimbursement of expenses) 3.15% 3.22% 2.78% 4.12%*(1)
Ratio of Net Investment Loss to Average Net Assets (2.25)% (2.24)% (1.76)% (1.23)%*
Ratio of Net Investment Loss to Average Net Assets
(excluding waivers and reimbursement of expenses) (2.79)% (2.94)% (2.03)% (2.78)%*
Portfolio Turnover Rate 64% 87% 58% 45%*
</Table>
* Annualized
# Non-annualized
**The Needham Aggressive Growth Fund commenced operations on September 4, 2001
(1)
Unaudited
See accompanying notes to financial statements.
19
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Financial Highlights
<Table>
<Caption>
Year Ended Year Ended May 22 to
(For a Share Outstanding December 31, December 31, December 31,
Throughout each Period) 2004 2003 2002**
- ----------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 16.84 $ 10.38 $10.00
- ----------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------------
Net Investment Loss (0.37) (0.06) (0.10)
Net Realized and Unrealized Gains(Losses) 2.11 6.52 0.48
- ----------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.74 6.46 0.38
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------------
Net Investment Income -- -- --
Net Realized Gains (0.05) -- --
- ----------------------------------------------------------------------------------------------------------
Total Distributions (0.05) -- --
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.53 $ 16.84 $10.38
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN 10.34% 62.24% 3.80%#
- ----------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $25,895 $27,616 $4,569
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.52% 2.27% 2.50%*
Ratio of Expenses to Average Net Assets (excluding interest
and dividend expense) 2.50% 2.26% 2.50%*
Ratio of Expenses to Average Net Assets (excluding waivers
and reimbursement of expenses) 2.63% 3.25% 6.06%*
Ratio of Net Investment Loss to Average Net Assets (1.91)% (1.68)% (2.04)%*
Ratio of Net Investment Loss to Average Net Assets
(excluding waivers and reimbursement of expenses) (2.02)% (2.66)% (5.60)%*
Portfolio Turnover Rate 68% 67% 107%*
</Table>
* Annualized
# Non-annualized
**The Needham Small Cap Growth Fund commenced operations on May 22, 2002
See accompanying notes to financial statements.
20
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
Notes to Financial Statements
1. ORGANIZATION
Needham Growth Fund ("NGF"), Needham Aggressive Growth Fund ("NAGF") and Needham
Small Cap Growth Fund ("NSCGF") or (the "Portfolios"), are portfolios of The
Needham Funds, Inc. (the "Fund"), which is registered under the Investment
Company Act of 1940 as a non-diversified, open-end management investment
company. The Fund was organized as a Maryland corporation on October 12, 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation: Investments in securities (including options) listed or
traded on a nationally recognized securities exchange are valued at the last
quoted sales price on the date the valuations are made. Portfolio securities and
options positions for which market quotations are readily available are stated
at the Nasdaq Official Closing Price or the last sale price reported by the
principal exchange for each such security as of the exchange's close of
business, as applicable. Securities and options for which no sale has taken
place during the day and securities which are not listed on an exchange are
valued at the mean of the current closing bid and asked prices. All other
securities and assets for which market quotations are not readily available are
valued at their fair value as determined in good faith by the Board of
Directors, although the actual calculations may be made by persons acting
pursuant to the direction of the Board of Directors. The assets of each
Portfolio may also be valued on the basis of valuations provided by a pricing
service approved by, or on behalf of, the Board of Directors.
Other: Security transactions are accounted for on the date the securities are
purchased or sold. The cost (proceeds) of investments sold (bought to cover) is
determined on a specific identification basis for the purpose of determining
gains or losses on sales and buys to cover short positions. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income is recorded on an accrual basis.
Use of Estimates: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates and those differences could be material.
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
The Fund has engaged Needham Investment Management L.L.C. (the "Adviser") to
manage its investments. The Fund pays the Adviser a fee at the annual rate of
1.25% of the average daily net asset value of each Portfolio.
The Adviser has voluntarily agreed to waive its fee for, and to reimburse
expenses of, each Portfolio in an amount that limits annual operating expenses
(excluding interest expense and dividend expense on securities sold short) for
each Portfolio for the year ended December 31, 2004 to not more than 2.50% of
average daily net assets of each Portfolio. For the year ended December 31,
2004, the Adviser waived advisory fees in the amount of $91,605 and $27,175 for
NAGF and NSCGF, respectively. The Adviser waived none of its fees for NGF during
the year ended December 31, 2004.
PFPC Inc. ("PFPC") acts as the Fund's Administrator. The Fund pays PFPC a fee at
the annual rate of 0.10% of the average daily net asset value of each Portfolio,
subject to certain minimums. PFPC also acts as the Fund's shareholder servicing
agent and transfer agent.
Certain officers and directors of the Fund are also officers and directors of
the Adviser.
4. FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and distribute substantially all of its taxable income and
capital gains to shareholders. Because income tax regulations differ from
generally accepted accounting principles, the timing and character of income and
capital gain distributions determined in accordance with tax regulations can
differ from income and capital gains recognized for financial reporting
purposes. Accordingly, the character of distributions and the composition of net
assets for tax purposes can differ from those reflected in the financial
statements. These book/tax differences may be temporary or permanent in nature.
Temporary differences are generally due to differing book and tax treatment for
the timing of the recognition of gains and losses on securities, including post-
October losses. Permanent differences are generally due to differing treatment
of net investment losses. To the extent these differences are permanent, they
are charged or credited to paid-in capital, accumulated net realized gain (loss)
or accumulated net investment income (loss), as appropriate, in the period the
differences arise. These reclassifications have no effect on net assets or net
asset value per share of each Portfolio.
As of December 31, 2004, the components of distributable earnings (loss) on a
tax basis were as follows:
<Table>
<Caption>
NGF NAGF NSCGF
- -------------------------------------------------------------
Accumulated ordinary
income (loss) -- -- --
Undistributed long-
term capital gains -- -- --
Accumulated capital
and other losses $(41,039,210) $ (167,877) $ (535,059)
Unrealized
appreciation/
(depreciation) 61,247,924 3,941,185 8,182,769
- -------------------------------------------------------------
Total accumulated
earnings $ 20,208,714 $3,773,308 $7,647,710
- -------------------------------------------------------------
</Table>
During the year ended December 31, 2004, NGF, NAGF and NSCGF each reclassified
the current year's accumulated net investment loss to paid-in capital, in the
amounts of $4,897,093, $378,269 and $482,199, respectively.
21
Notes to Financial Statements (Continued)
Needham Funds
- --------------------------------------------------------------------------------
At December 31, 2004, gross unrealized appreciation and depreciation for federal
income tax purposes of investment securities (excluding short positions) was in
the following approximate amounts:
<Table>
<Caption>
Gross Gross
Unrealized Unrealized
Appreciation Depreciation Net
- ----------------------------------------------------------------
Needham Growth Fund $81,995,961 $(14,415,339) $67,580,622
Needham Aggressive
Growth Fund 4,244,204 (303,019) 3,941,185
Needham Small Cap
Growth Fund 8,236,920 (54,151) 8,182,769
- ----------------------------------------------------------------
</Table>
For federal income tax purposes, the Fund measures its capital loss
carryforwards annually at December 31, its fiscal year end. At December 31,
2004, the following Portfolios had capital loss carryforwards for federal income
tax purposes in the following approximate amounts:
<Table>
<Caption>
Expires on December 31,
- -------------------------------------------------------------------------
2010 2011 2012 Total
- -------------------------------------------------------------------------
Needham Growth Fund $28,659,000 $12,380,000 -- $41,039,000
Needham Aggressive
Growth Fund -- 99,000 -- 99,000
Needham Small Cap
Growth Fund -- -- $535,000 535,000
- -------------------------------------------------------------------------
</Table>
NGF and NAGF each utilized capital loss carryforwards in the amounts of
$11,943,000 and $558,000, respectively, during the year ended December 31, 2004.
Capital losses after October 31 ("post-October losses") within the taxable year
are deemed to arise on the first business day of the Portfolios' next taxable
year. After October 31, 2004, NAGF incurred and will elect to defer net capital
losses in the approximate amount of $69,000. Neither NGF nor NSCGF had any
post-October losses.
On September 15, 2004 NSCGF declared a long-term capital gain distribution to
shareholders of record on November 11, 2004 in the amount of $68,474. The
dividend was paid on November 15, 2004.
5. TEMPORARY BORROWINGS
The Fund has entered into an agreement with the Custodial Trust Company for
temporary borrowing purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Interest is
calculated daily based on the Federal Funds Rate plus one percent. The Fund may
borrow from banks up to 25% of its total assets and may pledge its assets in
connection with these borrowings, provided that no additional investments shall
be made while borrowings exceed 5% of total assets. During the year ended
December 31, 2004, borrowings were as follows:
<Table>
<Caption>
Maximum
Weighted Weighted Amount
Average Average Number of Interest Borrowed
Interest Loan Days Expense During the
Rate Balance Outstanding Incurred Period
- ---------------------------------------------------------------------------------
Needham Growth Fund 2.26% $ 943,571 7 $ 415 $1,790,000
Needham Small Cap
Growth Fund 2.01% $ 539,444 27 $ 832 $1,500,000
- ---------------------------------------------------------------------------------
</Table>
NAGF did not have any borrowings during the year ended December 31, 2004. There
were no outstanding borrowings by the Fund at December 31, 2004.
6. DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Under the plan, each Portfolio pays Needham &
Company, Inc. and any other distributor or financial institution with which the
Fund has an agreement with respect to each Portfolio, a fee at an annual rate of
0.25 of 1% of each Portfolio's daily average net assets. For the year ended
December 31, 2004, NGF, NAGF and NSCGF incurred distribution fees in the amount
of $809,642, $41,914 and $63,107, respectively. For the year ended December 31,
2004, NGF, NAGF and NSCGF each paid 12b-1 fees to Needham & Company, Inc. in the
amount of $169,863, $26,166 and $20,737, respectively.
7. INVESTMENT TRANSACTIONS
The following summarizes the aggregate amount of purchases and sales of
investment securities and securities sold short, excluding short-term
securities, during the year ended December 31, 2004:
<Table>
<Caption>
Purchases Sales
- ---------------------------------------------------------
NEEDHAM GROWTH FUND
Long transactions $ 44,717,716 $103,811,307
Short sale transactions 23,247,465 282,316
- ---------------------------------------------------------
Total $ 67,965,181 $104,093,623
- ---------------------------------------------------------
- ---------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Long transactions $ 9,579,083 $ 9,298,005
Short sale transactions 994,240 131,904
- ---------------------------------------------------------
Total $ 10,573,323 $ 9,429,909
- ---------------------------------------------------------
- ---------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Long transactions $ 16,308,964 $ 17,665,494
Short sale transactions 1,757,478 514,224
- ---------------------------------------------------------
Total $ 18,066,442 $ 18,179,718
- ---------------------------------------------------------
</Table>
22
Notes to Financial Statements (Continued)
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
During the year ended December 31, 2004, NGF, NAGF and NSCGF each incurred and
paid brokerage commissions to Needham & Company, Inc. in the amount of $126,107,
$5,910 and $44,878, respectively.
8. OPTION TRANSACTIONS
The Fund may invest in options contracts to reduce the Portfolios' exposure to
fluctuations in the prices of portfolio securities and to prevent losses if the
prices of such securities decline. Similarly, such investments may protect the
Portfolios against fluctuations in the value of securities in which the
Portfolios are about to invest.
The Portfolios may write call and put options on securities they own or have the
right to acquire, and may purchase put and call options on individual securities
and indices written by others. Put and call options give the holder the right to
sell or purchase, respectively, a specified amount of a security at a specified
price on a certain date.
The Portfolios are subject to market risk associated with changes in the value
of the underlying financial instrument, as well as the risk of loss of
appreciation if a counterparty fails to perform. For exchange-traded contracts,
the exchange acts as the counterparty to specific transactions, and therefore,
bears the risk of delivery to and from counterparties of specific positions.
Put and call options purchased are accounted for in the same manner as portfolio
securities. The cost of securities acquired through the exercise of call options
is increased by the premium paid. The proceeds from securities sold through the
exercise of put options are decreased by the premiums paid. Options on stock
indices differ from options on securities in that the exercise of an option on a
stock index does not involve delivery of the actual underlying security and is
settled in cash only.
When a Portfolio writes an option, the premium received by the Portfolio is
recorded as a liability and is subsequently adjusted to the current market value
of the option written. Premiums received from writing options which have expired
are recorded by the Portfolio on the expiration date as realized gains from
option transactions. When a Portfolio enters into a closing purchase
transaction, the Portfolio realizes a gain or loss equal to the difference
between the cost of a closing purchase transaction and the premium received when
the option was written. If a written call option is exercised, the premium
received is added to the proceeds from the sale of the underlying security in
determining whether the Portfolio has a realized gain or loss. If a written put
option is exercised, the premium received reduces the cost basis of the
securities purchased. In writing an option, the Portfolio bears the market risk
of an unfavorable change in the price of the security underlying the written
option.
A summary of options written by NGF for the year ended December 31, 2004 is as
follows:
<Table>
<Caption>
Number of Premium
Options Written Contracts Received
- ---------------------------------------------------------
Options outstanding at beginning
of period 500 $ 158,745
Options written -- --
Options repurchased -- --
Options expired 500 158,745
Options exercised -- --
- ---------------------------------------------------------
Options outstanding at December
31, 2004 -- --
- ---------------------------------------------------------
</Table>
In the normal course of business, certain of the Portfolios will trade and hold
certain fair-valued derivative contracts which constitute guarantees under
Financial Accounting Standards Board Interpretation 45. Such contracts include
written options where the Portfolios would be obligated to purchase or sell a
specified security at a specified price if the option is exercised by the
counterparty. The maximum payouts for these contracts are limited to the number
of contracts written and the related strike price. The maximum payout amount
could be offset by the subsequent sale of assets obtained via the execution of a
payout event.
Neither NGF, NAGF nor NSCGF had purchased or written options during the year
ended December 31, 2004.
9. SHORT SALE TRANSACTIONS
During the year ended December 31, 2004, the Portfolios sold securities short.
Upon selling a security short, the Portfolios record a receivable for the
settlement amount and a corresponding liability, which is marked-to-market to
reflect current value. Securities owned by the Portfolios are segregated as
collateral while the short sales are outstanding. At December 31, 2004, the
market value of securities separately segregated to cover short positions was
approximately $20,813,000 for NGF. Additionally, included in Due from Brokers is
$7,230,382 pledged as collateral with the brokers in connection with NGF's open
short positions. Securities sold short at December 31, 2004 and their related
market values and proceeds are set forth in the accompanying Schedule of
Securities Sold Short.
23
Notes to Financial Statements (Continued)
Needham Funds
- --------------------------------------------------------------------------------
10. FINANCIAL INSTRUMENTS
The Fund has always maintained a policy of valuing its securities positions and
derivative instruments at market values or estimated fair values and of
including any realized or unrealized gains or losses in income.
In the normal course of its business, the Portfolios may trade various financial
instruments with off-balance sheet risk. These financial instruments include
securities sold short and exchange traded options. Generally, these financial
instruments represent future commitments to purchase or sell other financial
instruments at specific terms at specified future dates. Each of these financial
instruments contains varying degrees of off-balance sheet risk whereby changes
in the market values of the securities underlying the financial instruments may
be in excess of the amounts recognized in the financial statements.
Securities sold short represent obligations of the Portfolios to make future
delivery of specific securities and, correspondingly, create an obligation to
purchase the securities at market prices prevailing at a later delivery date (or
to deliver the securities if already owned by the Portfolios). As a result,
short sales create the risk that the Portfolios' ultimate obligation to satisfy
the delivery requirements may exceed the amount of the proceeds initially
received on the liability recorded in the financial statements.
11. CONTRACTUAL OBLIGATIONS
In the ordinary course of business, the Fund enters into contracts that contain
a variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
12. OTHER MATTERS
During the year ended December 31, 2004, the Adviser determined that certain
interest and dividend income/expense amounts had been under-recorded for NGF in
previous years and through June 2004. In connection therewith, an adjustment of
approximately $708,500 was recorded to recognize the correct net interest and
dividend expense relating to previous years in the 2004 statement of operations
(increasing the 2004 net investment loss per share by $0.07, increasing the 2004
ratio of expenses to average net assets by 0.43% and decreasing the 2004 total
return by 0.24%). Additionally, in October 2004, the Adviser made a payment to
NGF of $417,668 to reimburse NGF for a net overpayment to redeeming shareholders
during the period of time that the error persisted, which is reflected in the
statement of changes in net assets (which increased the 2004 total return by
0.14%).
24
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
The Needham Funds, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedules of investments and securities sold short, of The Needham Funds,
Inc. (the "Funds") (comprising Needham Growth Fund, Needham Aggressive Growth
Fund and Needham Small Cap Growth Fund), as of December 31, 2004, and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the three years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for each of the periods ended December 31, 2001 and 2000 were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial highlights in their report dated February
21, 2002.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Funds'
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our procedures included confirmation of securities owned as of December 31,
2004, by correspondence with the custodian and brokers. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the portfolios of The Needham Funds, Inc. at December 31, 2004, the results
of their operations for the year then ended, the changes in their net assets for
each of the two years in the period then ended, and the financial highlights for
each of the three years in the period then ended, in conformity with U.S.
generally accepted accounting principles.
-s- Ernst & Young Signature
New York, New York
February 21, 2005
25
Needham Funds
- --------------------------------------------------------------------------------
FUND MANAGEMENT
Information pertaining to the Directors and officers of the Fund is
set forth below. The Statement of Additional Information (SAI) includes
additional information about the Directors and is available upon
request, without charge, by calling 1-800-625-7071.
The address of each individual is 445 Park Avenue, New York, New
York 10022-2606. Each Director serves until the next annual or special
shareholders meeting or until his successor is elected and qualified.
There is no stated term of office for Directors.
<Table>
<Caption>
NAME, AGE AND POSITION PORTFOLIOS IN THE
WITH THE FUND LENGTH OF FUND COMPLEX PRINCIPAL OCCUPATION(S)
TERM SERVED BY OVERSEEN BY DURING PAST 5 YEARS AND OTHER
DIRECTOR/OFFICER DIRECTOR/OFFICER DIRECTORSHIPS HELD BY DIRECTOR/OFFICER
DISINTERESTED DIRECTORS
Roger W. Johnson, 70, Since 1996. Three President of Roger W. Johnson and Associates.
Director Director of Sypris Solutions, Inc., Maxtor
Corporation and Insulectro. Former CEO and
Chairman of Collectors Universe, Inc. (a service
provider in the collectibles market) from 2001
to 2002.
James P. Poitras, 62, Since 1996. Three Currently retired. Chairman of Kyma
Director Technologies, Inc. (a specialty materials
semiconductor company) since 2001, Director
since 2000. Founder, Chairman, President and
Chief Executive Officer of Integrated Silicon
Systems (a computer software company) from 1985
to 1995.
F. Randall Smith, 66, Since 1996. Three Founder and Chief Executive and Investment
Director Officer of Capital Counsel LLC (a registered
investment adviser) since September 1999;
Co-Founder and Managing Partner of Train, Smith
Counsel (a registered investment adviser) from
1975 to 1999.
INTERESTED DIRECTORS
George A. Needham, 62, Since 1996. Three Chairman of the Board and Chief Executive
Chairman & Director Officer of The Needham Group, Inc. and Chairman
of the Board and Chief Executive Officer of
Needham Holdings, L.L.C. since December 2004.
Chairman of the Board from 1996 to present and
Chief Executive Officer from 1985 to December
2004 of Needham & Company, Inc.
John C. Michaelson, 51, Since 1996. Three President & Chief Executive Officer, Needham
President & Director Investment Management L.L.C. since January 1997.
Managing Director of Needham & Company, Inc.
OFFICERS
James K. Kloppenburg, 49, Since 2001. Two Executive Vice President of Needham Investment
Executive Vice-President, Management L.L.C., Managing Director of Needham
Needham Aggressive Growth Fund & Company, Inc., since April 2001. Managing
Needham Growth Fund Director, Hambrecht & Quist, 1995 to 2001.
Vincent E. Gallagher, 61, Since 2002. Two Executive Vice President of Needham Investment
Executive Vice-President Management L.L.C., Managing Director of Needham
Needham Small Cap Growth Fund & Company, Inc., since February 2002. Managing
Needham Growth Fund Director of Gerard Klauer Mattison, June 2000 to
February 2002. Managing Director of Needham &
Company, Inc., 1993 to 2000.
Glen Albanese, 33, Since 1998. Three Chief Financial Officer of The Needham Group,
Treasurer and Secretary Inc. and Chief Financial Officer of Needham
Holdings, L.L.C. since December 2004. Chief
Financial Officer and Managing Director of
Needham & Company, Inc. since January 2000.
Chief Financial Officer of Needham Asset
Management from 1997 to 1999.
</Table>
Messrs. Needham, Michaelson, Kloppenburg, Gallagher and Albanese are
deemed to be "interested persons", as defined in the Investment Company
Act of 1940, because of their affiliation with the Fund's investment
adviser, Needham Investment Management L.L.C. and/or because they are
officers of the Fund and may be deemed to be an "affiliated person" of
Needham Investment Management L.L.C. and of Needham & Co., Inc.
26
ANNUAL REPORT 2004
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
DISCLOSURE OF PORTFOLIO HOLDINGS
The SEC has adopted the requirement that all Funds file a complete
schedule of investments with the SEC for their first and third fiscal
quarters on Form N-Q for fiscal quarters starting after July 9, 2004.
For the Needham Funds, Inc., this would be for the fiscal quarters
ending September 30 and March 31. The Form N-Q filing must be made
within 60 days of the end of the quarter. The Needham Funds, Inc. filed
its first Form N-Q with the SEC on November 19, 2004. It is available
upon request, without charge, by visiting the SEC's website at
http://www.sec.gov, or they may be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. (call 1-800-732-0330 for
information on the operation of the Public Reference Room).
VOTING PROXIES ON FUND PORTFOLIO SECURITIES
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to securities held in the Fund's
portfolios is available, without charge and upon request, by contacting
the Fund's administrator, PFPC Inc., at 1-800-625-7071 and on the SEC's
website at http://www.sec.gov. Information regarding how the investment
adviser voted proxies for the most recent twelve-month period ended June
30, 2004 is available, without charge and upon request, by contacting
the Fund's administrator, PFPC Inc., at 1-800-625-7071 and on the SEC's
website at http://www.sec.gov.
SPECIAL 2004 TAX INFORMATION
(UNAUDITED)
This information is for the fiscal year ended December 31, 2004, and is
included pursuant to provisions of the Internal Revenue Code.
The Needham Small Cap Growth Fund distributed $68,474 as capital gain
dividends (from long-term capital gains) to shareholders on November 15,
2004.
27
[THIS PAGE INTENTIONALLY LEFT BLANK]
[NEEDHAM FUNDS LOGO]
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Investment Adviser:
Needham Investment Management L.L.C.
445 Park Avenue
New York, NY 10022-2606
President
John C. Michaelson
Executive Vice Presidents
and Portfolio Managers
Vincent E. Gallagher
Needham Growth Fund
Needham Small Cap Growth Fund
James K. Kloppenburg
Needham Growth Fund
Needham Aggressive Growth Fund
Directors
George A. Needham
John C. Michaelson
Roger W. Johnson
James P. Poitras
F. Randall Smith
Distributor:
Needham & Company, Inc.
445 Park Avenue
New York, NY 10022-2606
212-371-8300
Administrator, Shareholder Servicing
Agent and Transfer Agent:
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
1-800-625-7071
Custodian:
PFPC Trust Company
301 Bellevue Parkway
Wilmington, DE 19809
Counsel:
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, NY 10103
Independent Registered Public Accounting Firm:
Ernst &Young LLP
5 Times Square
New York, NY 10036
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the covered period. The
registrant has not granted any waivers from any provisions of the code of ethics
during the covered period. A copy of the registrant's code of ethics is filed
herewith.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of directors has determined that there is at least one
audit committee financial expert serving on its audit committee. F. Randall
Smith is an audit committee financial expert and is considered to be
independent.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees. The registrant paid the following amounts to Ernst & Young LLP,
the registrant's principal accountant, for the audit of the registrant's annual
financial statements and services in connection therewith for the last two
fiscal years:
2004 2003
---- ----
$108,000 $98,000
(b) Not applicable.
(c) Tax Fees. The registrant paid the following amounts to Ernst & Young LLP,
the registrant's principal accountant, for the preparation of tax returns, tax
consultation, research and related items for the last two fiscal years:
2004 2003
---- ----
$16,000 $14,400
(d) Not applicable.
(e) Before Ernst & Young LLP, the registrant's principal accountant, is engaged
by the registrant, the registrant's investment adviser, or any entity
controlling, controlled by, or under common control with the registrant's
investment adviser that provides ongoing services to the registrant to render
audit or non-audit services, the engagement is approved by the registrant's
audit committee, subject to de minimis exceptions.
(f) Not applicable.
(g) The following table indicates the aggregate non-audit fees billed by the
registrant's accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the registrant for
each of the last two fiscal years of the registrant.
<Table>
<Caption>
2004 2003
---- ----
Agreed upon procedures provided to Needham Investment Management L.L.C. $15,000 $ 0
Tax services provided to Needham Investment Management L.L.C. $ 1,000 $600
</Table>
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers have
concluded that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the
"Act") are effective as of a date within 90 days of the filing date of the
report that includes the disclosure required by this paragraph, based on the
evaluation of these controls and procedures required by Rule 30a-3(b) under the
Act.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the
registrant's second fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a) (1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Filed herewith.
(2) A separate certification for each principal executive and principal
financial officer of the registrant as required by Rule 30a-2 under the Act are
filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1
under the Act sent or given during the period covered by the report by or on
behalf of the registrant to 10 or more persons: Not applicable.
(b) Separate certifications for the principal executive and principal financial
officer of the registrant as required by Section 906 of the Sarbanes-Oxley Act
of 2002 are furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
The Needham Funds, Inc.
By: /s/ John C. Michaelson
----------------------------------------
Name: John C. Michaelson
Title: President (Principal Executive
Officer)
Date: March 8, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ John C. Michaelson
---------------------------------------
Name: John C. Michaelson
Title: President (Principal Executive
Officer)
Date: March 8, 2005
By: /s/ Glen W. Albanese
---------------------------------------
Name: Glen W. Albanese
Title: Treasurer and Secretary
(Principal Financial Officer)
Date: March 8, 2005